Markets on edge as Crimea votes to quit Ukraine

Traders work on the floor of the New York Stock Exchange March 14, 2014. REUTERS/Brendan McDermid

NEW YORK (Reuters) - U.S. stock investors will start the week on edge as markets worldwide react to the referendum that appears to back Russia’s claim to Ukraine’s Crimean peninsula, even if the vote result is not internationally recognized.

U.S. stocks closed on Friday with their largest weekly drop in the last seven weeks as the worst confrontation between Russia and the West since the end of the Cold War continues to unfold. Markets were also haunted by concerns over a slowdown in China’s economy.

Dozens of Russians involved in Moscow’s gradual takeover of Crimea face U.S. and European Union travel bans and asset freezes on Monday. Russian state media quoted an exit poll as saying 93 percent of voters supported union with Russia.

The White House rejected the referendum and called Russia’s actions “dangerous and destabilizing.”

“There’s an open question as to who suffers most,” said Sam Wardwell, investment strategist at Pioneer Investments in Boston, about the planned economic sanctions.

Last week’s record decline in foreign holdings of U.S. Treasuries has led some to speculate that Russia has been cutting its dollar reserves ahead of possible sanctions from the West.

“It will be harder to make a new high (on the S&P 500) with these global and geopolitical effects overhanging,” said Andre Bakhos, managing director at Janlyn Capital in Bernardsville, New Jersey.

“I don’t know if these warnings signs result in dire results, but they are certainly to be considered when making a macro bet.”

The S&P 500 closed last week down 2 percent after hitting a record close on March 7. The decline in U.S. stocks was smaller than in other major markets but investors have been protecting their bets with other instruments.

The CBOE Volatility index VIX jumped near 10 percent to 17.82 on Friday, its highest level since early February, as investors were willing to pay more for protection against a drop in the S&P 500.

“Maybe the average investor isn’t acting worried, but I sure think option traders are bracing for some fireworks next week,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati.

The trading volume on spot VIX options was more than twice the norm on Friday, with the most active trades in the March and July 20 calls. The VIX has closed above 20 just one day this year, on February 3.

FED TO STAY THE COURSE ON TAPER

The U.S. Federal Reserve is also on investors’ radars for next week as a two-day meeting of its policy-setting committee kicks off on Tuesday.

The Fed could use the meeting, the first with Janet Yellen as chair, to map out its plan for rate rises, whether in the formal statement it issues afterward or in Yellen’s news conference.

The Fed has said that the first rate rise is likely to come around the middle of next year, as long as the U.S. economy keeps healing.

“Our anticipation is the Fed will taper again, maintaining the schedule they have. There seems to be a high hurdle for them to alter that schedule,” said Pioneer Investments’ Wardwell.

Recent weakness in economic data has been attributed in part to weather issues, and markets do not expect the Fed to veer its course of winding down its asset-purchase program by another $10 billion, bringing the monthly purchase total to $55 billion.

Market-sensitive data on tap for next week include housing starts and consumer inflation data on Tuesday and the Philly Fed survey, weekly jobless claims and home resales on Thursday.